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Pile On!

Said Mester the US is strong
And lest it goes terribly wrong
As I’ve been advising
Our rates will keep rising
That’s 2018’s theme song

Said Villeroy who spoke thereupon
When QE is finally gone
It’s quarters not years
Ere a rate hike appears
And the euro bulls called, “pile on!”

The dollar is broadly, but not universally, softer this morning as it continues to consolidate its strength of the past month. The latest driver was a series of comments by Banque de France governor, and ECB governing council member, Francois Villeroy de Galhau. Interviewed by Bloomberg TV before an event in Paris, he dismissed the slowdown in Q1 as temporary, but more importantly he said that once QE ends, which he confirmed would be in 2018, the “…extended period of time, well past the horizon of the net asset purchases” that the ECB has promised will follow before the first rate hike, will be measured in quarters not years. In other words, at its most aggressive interpretation, the ECB is looking to raise rates in the early summer of 2019. That is appreciably sooner than the market had been pricing, especially since the weak Q1 data was confirmed by weak April data. It should be no surprise that the euro rallied (+0.35%) in the wake of those comments, as part of its recent weakness has been attributed to the belief that the ECB would be forced to delay its policy changes. At the same event, Cleveland Fed President Loretta Mester, a current FOMC voter, reiterated her view that the Fed would continue raising rates and that eventually Fed Funds would rise above the neutral rate. However, given she is likely the most hawkish Fed member, there was no new information in her comments and so it did nothing to offset the Villeroy remarks.

If Villeroy is correct, and the Eurozone sees faster growth resume from Q2 forward, then we may well head back to the synchronous global growth narrative. This is likely to undermine the dollar somewhat going forward. But that remains to be seen, especially as the most recent data has not supported the idea that the Eurozone is rebounding. Until we see that data change, however, I see no reason to alter my view that the US is continuing to lead this economic cycle. In other words, last week’s mild dollar weakness seems far more likely to have been trading consolidation than the beginning of a new trend lower.

Away from those comments, the other Eurozone news was the agreement in Italy between 5 Star and the League to join forces and lead the country. This is by far the most radical antiestablishment outcome from recent European elections and their mooted programs, led by a Universal Basic Income and a low flat income tax, seem to be logically inconsistent and it is unclear how they will be able to implement them. It also seems that if they do, Italy’s fiscal problems are likely to grow with potential negative consequences for the euro. But it is early days, and talk is cheap. Let’s wait until we see something more concrete come from this new alliance.

The pound has also rallied this morning (+0.4%) as there seems to be a modestly more bullish take on the latest Brexit discussions within the British government, but that is not to say that anything has been agreed. Otherwise, within the G10, the dollar is only modestly softer with little in the way of news.

Emerging market currencies, however, have had a less successful session, with a number of them still struggling to find traction. We have discussed Turkey and Argentina, both of which have significant structural problems. Malaysia’s markets reopened last night for the first time since the surprising election results that brought Mahathir Mohamed back to power. With the nation’s markets closed on Thursday and Friday last week, today was the first time to see how things would respond to the results. MYR opened lower by more than 1%, as the equity market there fell sharply on the opening as well, but as the day progressed, it regained the bulk of those losses and, in fact, MYR is essentially unchanged from its pre-election levels at this time. As to the rest of APAC, the dollar was mixed, gaining vs. some and falling vs. others, but with no rhyme or reason and no large movers. EMEA currencies have generally fared better, with most stronger this morning, although TRY continues to suffer, and MXN, the only LATAM currency open as I type, has regained a bit of its recently lost luster. Watch BRL, where the presidential election is beginning to heat up, and its growing current account deficit combined with the political uncertainty has led to a steady decline all year, almost 9% so far. I fear it may have further to fall.

Data this week is far less interesting than last, but is as follows:

Tuesday

Retail Sales

0.3%

-ex autos

0.5%

Control Group

0.4%

Empire Manufacturing

15.5

Business Inventories

0.3%

Wednesday

Housing Starts

1.325M

Building Permits

1.35M

IP

0.6%

Capacity Utilization

78.4%

Thursday

Initial Claims

217K

Philly Fed

22.0

Leading Indicators

0.3%

Arguably, Retail Sales tomorrow will be the biggest draw, but given that inflation has been the watchword, not growth, it doesn’t feel like it will have that big an impact. We also hear from four more Fed speakers this week, and we get some important Chinese data on Retail Sales and Fixed Investment. In the end, though, it doesn’t feel like there is good reason to believe that FX is going to be that interesting this week. My sense is that the dollar will continue to consolidate as we await the next grouping of data. If we continue to see relative strength in the US data compared with the Eurozone and the UK, the dollar should resume its recent uptrend. However, watch Wednesday when Signor Draghi speaks, as if he confirms the Villeroy comments, it could have a big impact with the euro rallying more sharply.